The troubled trade deal with South Korea

SEOUL — In March, the United States and South Korea implemented a Free Trade Agreement that President Barack Obama touts as more significant than the last nine such agreements combined. He also said it was central to his goal of doubling American exports within five years.

I think the president suffers from irrational trade exuberance, a view reinforced by my reporting in this city of 10 million people.

This deal is likely to turn out badly for American taxpayers and workers, especially autoworkers.

The president predicted 70,000 American jobs would be created as U.S. exports to South Korea grow faster than imports.

That would be terrific for generating taxes and reducing demand for government services like food stamps, which have become the sole income for about 6 million Americans.

But — based on previous major trade deals, the details of this one and a host of Korean business and cultural barriers — I think a much more likely scenario is the destruction of more than 150,000 American jobs over the next few years, as projected by the Economic Policy Institute, a Washington research organization that advocates for low- and middle-income workers.

TRADE PROJECTIONS

The president’s optimistic statements, made in December, drew on projections by the U.S. International Trade Commission. It predicted that U.S. exports to South Korea would grow at least 52 percent more than imports, creating tens of thousands of American jobs. A March update predicted that eventually exports of U.S. cars to South Korea will “likely increase significantly.”

This is the same agency that predicted that liberalized trade with China would result in a $1 billion annual trade deficit for the United States. The actual 2011 deficit: $295 billion.

And remember NAFTA? The United States ran a $1.6 billion trade surplus ($2.6 billion in today’s dollars) with Mexico in 1993, the year before NAFTA. Last year, the United States ran a $64.5 billion deficit.

The United States has consistently run trade deficits with South Korea – more than $13 billion last year, according to the U.S. Census Bureau. And, of course, the trade agreement has only been in place a few months. But it is worrisome that the deficit for April and May, after the agreement took effect, soared 63 percent compared with a year earlier.

The U.S.-South Korea trade agreement was reached in 2007, but implementation was held up by objections from some American companies. Notably, Ford Motor Co complained to Congress and in advertisements that South Koreans who bought Fords were hit with tax audits. Ford said the final agreement is much improved, but still not ideal.

In Seoul, local people told me that buying an American-made car risked opprobrium from employers and neighbors.

In three days in Seoul, as the video accompanying this column shows, I found very few American-made cars. Three, on a showroom floor, were Toyotas built in Ohio. On the streets, I counted a half dozen Chrysler vans, a similar number of Ford sedans and one Jeep but not a single American luxury car. I also saw a smattering of cars with Chevrolet nameplates, but they were built locally by the old Daewoo, now called GM Korea.

The foreign cars I spotted most often were Mercedes-Benz, BMWs and Bentleys, brands that seem to resonate more strongly with South Koreans eager to display their affluence.

That fits with the official South Korean data on auto sales. More than nine out of 10 cars sold here are made in South Korea. European luxury cars, sold under a European Union free trade agreement signed last year, far outsell any Detroit cars. Last year, American-made cars sold in the thousands, a fraction of one percent of car sales in South Korea. In June the best-selling American model was the Ford Explorer, with just 109 sold, less than a tenth of one percent of vehicles sold that month.

In the United States, sales of Hyundai Motor Co and Kia Motors Corp, which are owned by the same company, grew 26 percent last year and accounted for every 11th new car sold.

BARRIERS CITED

Sean McAlinden, chief economist for the nonprofit Center for Automotive Research in Ann Arbor, Michigan, which studies how public policy affects the industry, ticked off all sorts of non-trade barriers to American-made cars in South Korea. “There aren’t going to be any more American auto industry jobs because of this trade agreement,” he said.

Indeed, a report by the Congressional Research Service details subtle trade barriers.

Since 2000, the United States has lost almost a third of its manufacturing jobs. Those 5.5 million jobs are the equivalent of eliminating every non-farm job in Michigan and Iowa plus metropolitan Valdosta, Georgia, a serious crisis for blue-collar Americans.

President Obama, the White House told me, continues to believe that his trade policies will mean more American jobs, including manufacturing jobs. That sounds good but lacks factual support.

The opening of Hyundai and Kia assembly plants in the United States may seem like a benefit to the U.S. economy. But taxpayers covered much of the cost. And the value-added work in cars comes less from assembly than from making precision high-strength steel parts, especially in the drive train. To the extent that parts are made in South Korea and shipped to the United States for assembly, the added economic value tends to remain overseas.

One caveat: The way U.S. economic statistics are calculated may miss where value is added in manufacturing cars and other items because of subtle changes in licensing intellectual property, supply chains and other factors, as the Congressional Research Service explained in a report last year.

Jung Jong-yung, America division director at South Korea’s Ministry of Knowledge Economy, told me to expect more jobs in both countries, especially four years from now and beyond.

Maybe. But the evidence so far suggests this deal will be a boon for South Korea and another economic albatross for America.

If these trade deals are hurting the US, why do we keep doing them? Isn’t that the obvious question? The US government doesn’t do something unless someone, or some key industry, is profiting (not to be confused with profiting in such a way as to create jobs in the US. What I mean is, what group of US business executives are increasing their profits from these trade deals and making major donations to the campaigns of politicians who support them?) Surely our Presidents don’t keep doing these deals without reason, even if that reason does hurt Americans (which is usually the case). Why do we continue letting ourselves get screwed?

Proof positive Economists’ deep ideological set on trade. The experience is for most part high wage nations export jobs with free trade to low age nations with reasonable business infrastructure.

Which means the our policy should be to import what we need and can afford to. Also by all means balance imports with exports even if requires things that can be considered export subsidies. If we hurting for exports we should tax non-exporting firms. Give exporting firms that are expanding American exports and payroll and wages a free a subsidy for financing expansion. But there no reason for us to seek much more exports than imports since there not much one can do with extra foreign credit but buy imports or give aid. Also there little reason to keepo low wage industries.

Because of the inverse relationship between population density and per capita consumption, trade with nations far more densely populated than the U.S. is a sure-fire loser. With a population density 15 times that of the U.S., South Korea is no exception. We see the same thing with China, Japan, Germany, Taiwan and a host of others. Conversely, trade with more sparsely populated nations like Canada, Australia, Brazil and others is almost always beneficial to the U.S.

Until U.S. trade policy recognizes the role of population density disparities in driving global trade imbalances, and makes intelligent use of tariffs to maintain a balance of trade with densely populated nations, the U.S. will continue to suffer huge trade deficits and will continue to export manufacturing jobs to nations who come to the trade table with nothing to offer except bloated labor forces hungry for work.

The simple answer to this is money for the wealthy elite that control all governments. Americans need to get the misinformed idea that our government represents it’s citizens and not corporate masters. Somehow we are still brainwashed that concepts and ideas like patriotism and democracy really still exist within our elected officials. We have let capitalism become our de facto driving paradigm. Capitalism is an economic model not a government. It surely has a vital place in all societies, but is most often at countervailing goals of democratic goals. Until we wake up and demand that American citizens and what is in their best interests are placed as a first priority then we will continue our slide in wages, benefits, and quality of life as the ruling aristocrats of every nation create a new global gilded age. The workers of the world will collect the meager crumbs while the well-connected overlords will own the everything else.

It does seem striking how the data does not support the conventional wisdom that free-trade is a jobs creator for the US. However, that conventional wisdom fails to acknowledge that removing barriers to trade means that production SHOULD go to the country with the lowest production costs. The data DOES support that theory.

One way to balance this out would be to introduce environmental and social tariffs on goods from countries with environmental and social regulations that are weaker than ours. I don’t think the WTO would go for that. But it is an economically fair trade since our regulations are meant to control externalities such as pollution and workplace safety. Not doing this is paramount to our exporting our pollution right along with our jobs. Neither is good and neither is just.

When do politicians finally realize that in a globalized laissez-faire supply side economy, it is only the money that is free (to do what it wants)…not the people…and…should not they represent the people?

@Leedap aug1 3.44

I would go much further than that, I would rather also balance the cost of living out with an annually to be revieuwed import tax (lost jobs tax)on luxury goods imported from low wage countries. compare the “shopping basket” (“Big Mac index”) each year and determine the percentage on the basis of that.

@Fixthedebtnow aug3 7.06
I think there is also a big hitch in the way (modern) capitalism works in this and other Western countries..it is basically unpatriotic and based on greed..

I think the new treaty between the U.S and South Korea can not work, because American (as well as European) businessmen find it much more profitable to export work and import goods than to keep jobs and export goods.

The difference in cost level is too high, that’s why, That difference should be eliminated and the only way to do that is by means of (heavy, ..fully compensating..) import duties (Lost Jobs tax)on luxury non food/cultural products.

This article cites 0 official figures, studies, or cases. And the author is only talking about the Auto sector, and that’s also based on his ‘observation’ or a few cars on the streets of Seoul. The auto industry will benefit, because it will bring down korean tarriffs and will make US autos more attractive. He author also didn’t mention the agriculture sector, especially that of beef, which South korea is the second largest buyer of US beef after Japan. THe US will reap in hundreds of billions with the FTA.

This is clearly a paper on the author’s poorly-supported biased opinions, not a well researched argument.

It would be foolish for the U.S. to cede the S Korean market to our European competitors; they signed a free trade agreement with the Koreans prior to us. Boeing, pharmaceutical firms, medical equipment manufacturers need access to this market, the 7th largest economy in the world.
Also, over 80 % of the U.S. trade deficit is with countries that do not have bilateral agreements with the U.S., which includes China, Germany, Japan, and Ireland.
As for NAFTA, it is tiresome to see the old discredited arguments trotted out, about how we had a trade surplus with Mexico in 1994 and look at us now, etc. The U.S. imports large quantities of oil from Mexico, which adds to the U.S. deficit. And the U.S. trade relationship with Mexico is more balanced than it is with Germany, Japan,Ireland (in terms of import/export ratios)and many other countries.
Blaming bilateral trade agreements for America’s trade deficit is completely off the mark. The U.S. had a slight trade surplus with Ireland in 1994 when NAFTA was inked – and now the U.S. has a deficit of $26 billion.

Did you actually READ my column, which is chock full of data from official sources, contrary to your assertions, including official car sales data?

@ Cassippian,

As the video notes, the US used to have a trade deficit equal to about 1% of its economy, while now it is approaching 4%. And if NAFTA is such a great deal why isn’t Northern Mexico flourishing? Just what would you blame for America’s trade deficit?

I agree with depolkun. Data is sparsely used at best in this article and when it does use data, it’s only to back his already decided views. For example, he sites the U.S. trade deficit with Korea but fails to mention that this is only on industrial goods and doesn’t include the surplus in services trade. He also mentions the the $295 billion deficit with China but assumes that we have already fully liberalized trade with China, which we certainly have not. Overall, this is just “par for the course” rhetoric from the anti-trade camp.

Nations have used trade tariffs to balance trade and protect their citizens since the dawn of the nation-state. For thirty years we have been told that we live in a new era, in which the old certainties no longer apply. The result — the hollowing-out of our country: countless towns whose major industry is now demolition of their once-proud factories, the rubble to be separated and sold as scrap, shipped abroad to countries whose workers live on a tiny fraction of what it costs to survive here. A Japanese acquaintance recently remarked, “In America, everything is broken, and nobody cares.”